Healthcare, commented Peters, is unique from other asset classes and his firm has acquired about $700 million in assets in the past several months. He said Healthcare Trust of America’s strategy is different in that it likes to do deals with healthcare providers that need capital; some 92% of the firm’s portfolio now consists of medical office assets, more than three-quarters of which are on campuses. The firms recent acquisitions have been larger, in the $150-million to $170-million range, and most have been with healthcare systems. “That will be the new process,” said Peters. “Healthcare systems are getting real estate off their balance sheets; they’re turning into businesses.”

The CEOs said that it’s generally not in their firms’ strategy to invest in debt, but they are keeping an eye on distressed opportunities. Schorsch said the distressed deals haven’t materialized until now because the banks didn’t have the capacity to handle all the assets on their desks. “That’s changing, but it’s not going to be a panacea,” he said. “As opposed to buying assets at 30% their 2007 peak pricing, it’s going to be more like 60% to 70%.”

Gujral admitted that legacy issues do provide opportunities for new players to come into the market, but some non-traded REITs have been able to handle their legacy issues. Her firm’s Inland Western Retail Real Estate Trust, for instance, has been very successful in refinancing its debt, and Inland American has been able to pay down some of its debt. Meanwhile, Merriman said Industrial Income Trust doesn’t have legacy issues, since it’s a new market entrant and “the recession has been very good to the industrial sector.”

The flip side to legacy issues, noted Goldberg, is that they can benefit some entities. “A lot of the assets in current funds were purchased between late 2007 and early 2010,” when real estate prices started declining, he said, adding that 2009, for instance, was a tremendous buying opportunity. “Anyone with a track record, frankly, has to have a legacy issue.”

Schorsch echoed that statement: “Products bought in late 2007 to early 2010 are good legacies,” he said. “Most of our products have no legacy issues and it all comes down to how they’re managed. There are certain aspects of real estate today that have not hit bottom.”

Dividend coverage was also top-of-mind for the CEOs. Thurston asked the panel what they feel is a fair dividend, and whether they feel pressure to cover their dividends. Merriman noted his firm has a low dividend, about 6.25%, since industrial has lower returns than other sectors. “Fortunately, we’ve been able to buy industrial at 8%, so we can cover the dividend.”

Commenting on whether there’s room in the market for a lower dividend that would reflect today’s lower cash flows, Schorsch said, “Broker dealers are beginning to understand that the market is changing. It’s not what you pay, but it’s what you can afford to pay.”

The non-traded REIT space will likely remain relatively small compared to the greater commercial real estate market, but the sector will certainly undergo changes over the next couple of years. Given the dominance of the market by private players—estimates are that some 80% of property is privately owned—the CEOs maintained that attracting that capital is key to growing the business. Merriman stressed, “We need to buy real estate that the 80% gorilla in the market wants to own.”

The challenge over the new two or three years, noted Peters, “is to attract institutional players and have a strategy that’s acceptable to the public markets—the Cohen and Steers and AEWs of the world.” The non-traded REIT industry, he stated, is suffering from organizational challenges and needs to find a way to turn cash into liquidity.

Schorsch predicted that although the industry will likely grow to between $25 billion and $30 billion, a lot of product will fail. It’s important to have clear entrance and exit plans. “We expect to see one of our products going full cycle over our platform within 18 months—that’s why we have six to eight products out at a time, so investors will see that change and improvement,” he shared. “For capital raising, it all comes down to the exit. This is an even bigger business than the IPO market on Wall Street.”

The industry’s growth was addressed again later in that day during a keynote speech given by Tony Thompson, chairman and CEO of Thompson National Properties LLC, who presented his thoughts on what separates the winners from the losers in the market. “Why are we all in this business?” he asked the audience. “Hopefully, we’re all in it for the same reason—to serve investors well. If served well, they’ll reinvest,” and that’s good for the business.

Citing data from Robert A. Stanger & Co. Inc., Thompson pointed out that of the 33 non-traded REITs the firm tracks, only eight are covering their distributions from FFO. This won’t be sustainable, he said, and expect more REITs to adjust their dividend rates. “We have to prepare ourselves because it’s going to happen.”

When looking at the characteristics of “winners” and “losers,” Thompson said it all comes down to the same factors: management, FFO/coverage of distribution, luck, timing and character. “The value-add is where the separation is between winners and losers,” he said. “How am I going to best add value for my investors?

“We all lose. We all make mistakes and face challenges,” he admitted. “It’s how you handle those challenges and come back to your investors is what differentiates the winners.”

And being the biggest isn’t necessarily the best thing, Thompson said of the growth of some firms in the market. Smaller players have been some of the biggest success stories in terms of creating a liquidity event for investors. Among the “winners,” the CEO listed Realty Income Corp., a buyer of necessity retail properties also considered the “monthly dividend company” in the market; ROC Properties/Chateau Communities Inc., an investor in manufactured communities that was sold to Hometown America in 2003; WP Carey’s Carey Diversified LLC; Dividend Capital’s DCT Industrial Trust; Wells’ Piedmont Office Realty Trust; and Inland, with its buy of Developers Diversified Realty.

Though he didn’t name specific companies when he went over the “losers,” Thompson noted that the “REIT wrecks” in the market shared similar characteristics: aggressive financing with near-term debt maturities; high ongoing fees such as property and asset management fees and financing/leasing fees; lacked proper diversification; and bought at the height of the market.

Buying at the height of the market, when there’s a general feeling of euphoria pervading the business, poses the maximum financial risk to a property player. Buying when the market is low, when there’s a sentiment of despondency, is when the risk-reward is the highest. It’s simple, said Thompson, quoting Warren Buffet: “Just buy when everyone else is selling.”